The Influence Of Private Equity On Earnings Management In Listed Companies

As a financial innovation, Private Equity (PE) has developed rapidly andattracted people’s attention in recent years. In China, PE mainly invests insmall and medium enterprises (SMEs) which has high potential of growth inthe Small and Medium-sized Enterprise Board (SMEB) and GrowingEnterprise Board (GEB). Both international and domestic practice andresearch have demonstrated that PE has played a pivotal role in a largenumber of listed companies. However, whether PE can enhance the qualityof financial information and improve the corporate governance remainscontroversial.This article investigates the influence of PE on earnings management inlisted companies, using comparison and statistical analysis methodology.This article collects and studies117listed companies which submitapplications and being approved on SMEB and GEB in2009. All samplecompanies are divided into two groups (PE-backed or non-PE-backed)according to their final prospectus. From a contiguous prospect, this articlecompares the accruals and offline items of these two groups from2007to2011, and establish two multiple linear regression models(DA model andCRT model) to examine the influence of PE on earnings management inlisted companies.The results demonstrate that compared to non-PE-backed companies,PE-backed companies manage earnings mainly through accrued profits,which cannot be found easily. Meanwhile, PE-backed companies’ accrualsand offline items during2007-2011are more balanced than non-PE-backedcompanies’. Because PE has rich experience about investment, solidfoundation of professional knowledge and wide social networks. Moreover, the study also finds that the ROA of sample companies decrease from2007to2011. In the two years before IPO, companies manage earnings mainlythrough accrued profits, while offline items are very low; in the IPO year,companies’ accrued profits go down sharply; in the two years before IPO,companies’ accruals and offline items are both high. Besides, if companies’asset-liability ratio and the proportion of outstanding stocks are high, theaccruals and offline items are also higher than other companies. It showsthat under the pressure of high debt and large number of outstanding stocks,companies have more motivation to manage earnings. In addition, ifcompanies’ proportions of independent directors are high, the accruals arelower than other companies. It means that independent directors takeresponsibility to conduct the quality of accounting information in listedcompanies very well. Those companies in which chairman and generalmanager is the same person, they mainly manage earnings accrued profits.As PE stepped in China late and the development of Chinese PEindustry is immature, meanwhile, the domestic securities market isimperfect and the professional knowledge of domestic accountants islimited, PE cannot inhibit listed companies to manage earnings. However, inorder to make more profit through arbitrage, PE helps listed companiesmanage earnings through accruals, which is a more covert way. Therefore,due to in different securities markets and different development period ofcompanies, the influence of PE on earnings management in listedcompanies are not the same.